I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

Do We Really Trust Corporations To Investigate Their Own Profitable Impropriety?

Head of Grant & Eisenhofer's Washington office and whistleblower practice, and Senior Fellow and Adjunct Professor at Emory Law School.

Can a corporation really investigate its own behavior? Do internal compliance programs really work, or does their mere existence give well-compensated employees plausible rationale not to question conduct that would otherwise be questionable?

Answering these questions must begin with the age-old concern about conflicts of interest. The Book of Matthew counsels that “no man can serve two masters.” Our democracy itself is founded out of concern for the evils of self-interest, a form of conflict of interest. We abandoned a monarchy in favor of elected officials and then, fearing their self-interest, we created a system of checks and balances.

As our democracy emerged, scrutiny of conflicts of interest that might taint decision making – or at least the decision itself – has become ingrained in our processes. Corporations that are engaged in litigation must file disclosure statements identifying their affiliated entities so that judges can disqualify themselves – or be subject to disqualification – where they perhaps maintain a stock ownership interest associated with a litigant. Attorneys are schooled early on about the pitfalls of bringing a client into a business deal where the attorney has an interest. When our labor laws were promulgated in 1935, there were proscriptions against company dominated unions. Why? Because an employer has an inherent conflict of interest between steering a course toward maximizing shareholder returns and maximizing employee pay and benefits.

Given that the concern about conflicts of interest is so ingrained in our way of thinking, rejection of proposals to allow corporations to investigate themselves as a predicate to government regulatory agency involvement should be logical. Can we count on a corporation to investigate itself, to fully and accurately disclose its conduct so that victims may take recourse, and at the same time take action to prevent recurring wrongdoing – all of which may cause the business to lose money? And if a corporation were able to fulfill these tasks, would the reported result have sufficient integrity to withstand public scrutiny? Do we really trust the reports of corporations that investigate their own improprieties?

Representatives of the U.S. Chamber of Commerce – actually not just mere representatives, but lawyers supposedly versed in the doctrine of conflicts of interest – recently testified before a U.S. House of Representatives Oversight Committee that whistleblowers ready to pursue relief under the False Claims Act should be incentivized or required to allow a corporation to investigate its own alleged wrongful conduct before any concern is raised to an independent government authority.

The False Claims Act – dating back to 1864 – allows private citizens to bring suit on behalf of the United States Government where they have knowledge that wrongful or fraudulent conduct has caused the expenditure of government monies. Civil penalties under the statute may also be assessed when a “false claim” for payment “is submitted or caused to be submitted.” All cases filed under the False Claims Act are filed under seal allowing the government to investigate the case before public litigation actually proceeds. Sometimes civil litigation initiated by whistleblowers under the False Claims Act has resulted in parallel criminal proceedings. Examples include cases against Pfizer, GlaxoSmithKline, and Abbott Laboratories. Civil and criminal sanctions exceeding $6 billion in total were imposed against these companies for unlawfully marketing drugs that caused the expenditure of Medicare/Medicaid dollars. And in each of these cases the defendants or their subsidiaries pleaded guilty to a criminal infraction because – as the plea agreements made clear – they were guilty.

Each of these companies had internal compliance programs, and yet in each case the wrongful conduct was pervasive, brought billions of dollars of revenue to the Defendant, and persisted for years. These are not isolated examples. Enron, Tyco, and WorldCom all had internal compliance programs that proved incapable of addressing pervasive and, at least initially, profitable wrongdoing.

Where wrongful conduct actually results in increased revenue that rewards corporate officers and employees, is it plausible that a corporation’s internal compliance mechanism can freely and fully investigate and right wrongful behavior? Do corporations, and those individuals that guide them, really have an incentive to fully address wrongful conduct that generates significant revenue? These are important questions particularly at a time when civil and criminal penalties are merely part of the cost of doing business; they are as much “a part of the game” as is a calculated tripping penalty in an ice hockey contest where a goal is imminent. The truth is that even after Pfizer, GSK, and Abbott collectively paid billions of dollars to settle charges of unlawful marketing, these pharmaceutical giants still walked away with billions of dollars in profits from their unlawful conduct. Even the public announcement of settlements and guilty pleas had little or no impact on their market capitalization!

The point is that companies and corporate officials that make money off of wrongful conduct have a conflict of interest when it comes to self-investigation of profitable impropriety. There is a real danger – and not just an economic one – in requiring whistleblowers to utilize internal compliance reporting mechanisms before voicing concerns to independent government regulators. In the False Claims cases against Pfizer, GSK and Abbott, the underlying allegations involved marketing derelictions that potentially placed patients in harm’s way or perhaps even caused personal injury or death. Do we really want to encourage matters of health and safety to be kept from independent government regulators and perhaps injured victims? Do we really a trust a company that placed revenue over patient safety to investigate its own impropriety and come clean?

If internal compliance programs are not effective in addressing pervasive wrong doing, the question remains as to whether they are – at worst – merely benign. Should we be legitimately concerned that the existence of these programs may cause employees not to question corporate behavior? In the cases involving Pfizer, GSK, and Abbott, the alleged wrongful conduct was not any secret to the hundreds of sales representatives who dallied from doctor to doctor hawking drugs. Yet only a few insiders stepped forward to blow the whistle. Did there exist corporate cultures leading employees to believe that giant corporations with internal rules and compliance programs could do no wrong? Why, for example, in the case General Motors’ faulty ignition switches, did the revelation of the wrongdoing not come from a GM employee but from an outside expert working for a plaintiff’s lawyer?

While these are all important questions, their answer is perhaps age-old and embedded in biblical wisdom. Unfortunately creating the illusion that a corporation can investigate its own alleged impropriety may very well lull the diligence of those who would otherwise raise concern.

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Excellent and provocative question, and very well-put. You can make a case that the rebuttable presumption must be that money clouds the judgment, and that extraordinary malfeasance must require extraordinary evidence of redemption to change that.

It’s interesting that such issues seem far more prevalent in financial services and in pharmaceuticals than in other industries. Both are awash in money.

Money does cloud judgment, including the decision of whether to bring evidence of wrongdoing to management, so it can be halted, or going to an outside law firm that will share the proceeds of any settlement with the whistleblower. The whistleblower in that situation has no incentive to have the behavior stop, because the longer it goes on the bigger the settlement.

Good question Daniel. Perhaps there is a third option. This paper by Scott Killingsworth “Modeling the Message: Communicating Compliance Through Organizational Values and Culture” suggests that management/leadership holds the key. Sort of a “no brainer” but rarely put into practice. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2161076

But how does management encourage compliance in a system where employees have a huge financial incentive to avoid internal systems and take evidence of wrongdoing to private lawyers? The UK looked at our whistleblowing laws and decided to take a pass for that very reason.

Laughable. Enron and Worldcom were complex accounting frauds perpetrated at the top of the company. Worldcom was revealed by the Internal Audit director… an internal compliance program as you say. In my experience with government regulators they cannot find their rear end with both hands. Most lawyers cannot find it either. If you would suggest a constant forensic independent investigative team to be at each corporation in America the cost would be overwhelming and not productive in any way. What exactly are you suggesting be done that has any practical application?